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When the economy is down, mortgage lenders tend to become more selective when lending money. Tightened home loan standards can make it difficult to qualify for a mortgage. For those who can't qualify for a mortgage or just don't want one, contract-for-deed and lease-to-own options exist. Both home-purchase options come with advantages and disadvantages.

Contract for Deed

A contract for deed, which is more readily known as a land contract, is a formal contract that exists between a home's seller and its buyer. When a contract for deed is executed, the seller agrees to allow the buyer to pay off the home in installments. In a contract for deed, the seller continues to retain title to the home while the buyer holds what's called an equitable title.

Lease to Own

Lease-to-own agreements require that part or all of the rent paid by renters be applied to their home's final purchase price. Under a lease to own, a seller sets a home's final purchase price when the agreement is finalized. Renters under lease-to-own agreements have an exclusive option to buy their homes for a specified time. On the other hand, in rent-to-own agreements, renters aren't legally obligated to purchase the homes they're renting.

Advantages

Contract-for-deed and lease-to-own agreements both feature less paperwork than what's found in traditional mortgages. Also, buyers with weaker credit or little money to put down can benefit from contract-for-deed and lease-to-own programs. Under a lease-to-own home-purchase agreement, the landlord still can maintain control over her property. Finally, a contract for deed really does confer a small degree of equity in the home to its purchaser.

Disadvantages

Buyers under lease-to-own agreements are renting the property for a time. Additionally, under a lease to own you'll need the landlord's permission to make any property improvements. In a contract for deed, a seller is financing his buyer's purchase and only collects monthly payments, not the lump sum. When a buyer in a contract for deed defaults, the seller has to do all the legal work in enforcing its terms or voiding it altogether.

Caution

Tough economic conditions tend to bring out real estate scam artists. Unfortunately, both contract-for-deed and lease-to-own programs enable unscrupulous scams. For example, a seller in a contract for deed could attempt to void the entire contract if even one payment is missed. Never sign a contract-for-deed or lease-to-own agreement without thoroughly reading and understanding its terms and conditions first.

About the Author

Tony Guerra served more than 20 years in the U.S. Navy. He also spent seven years as an airline operations manager. Guerra is a former realtor, real-estate salesperson, associate broker and real-estate education instructor. He holds a master's degree in management and a bachelor's degree in interdisciplinary studies.